9 Nov 2017

Powering Investment in Laos

China and Laos jointly initiated work on the second phase of the 1,156-megawatt Nam Ou Cascade Hydropower Project earlier this year. The project, set on Laos' principal river, is seen as one of the country's key contributions to China's Belt and Road Initiative.

With Laos' GDP for 2016 recorded at just US$15.9 billion, China has shouldered the bulk of the cost of the US$2.8 billion initiative in exchange for the concession to operate the hydropower installation for the next 29 years. Once completed, it will comprise seven dams and hydropower stations and have a projected capacity of 1,156 megawatts, together with an annual energy output of 5,017 gigawatt hours.

The lead on the Chinese side has been taken by Sinohydro, a Beijing-headquartered state-owned hydropower engineering and construction company, which entered into an agreement to develop the project on a joint-venture basis with Electricite Du Laos (EDL), the Laos state electricity corporation, which holds a 15 per cent stake in the site. Under the terms of the project, all electricity generated will be sold to EDL. Significantly, Nam Ou is the first project for which a Chinese enterprise has secured the whole basin rights for planning and development.

With work on Phase One completed more than two years ago – comprising construction of the Nam Ou 2, Nam Ou 5 and Nam Ou 6 plants – the site generated its first electricity on 29 November 2015. In total, the capacity of Phase One is estimated at about 540 megawatts, almost half the total envisaged for the completed project. The groundbreaking ceremony for the second phase was held about five months later and marked the beginning of work on the remaining plants – Nam Ou 1, Nam Ou 3, Nam Ou 4 and Nam Ou 7. The second phase is scheduled for completion in 2020.

"Once completed, the Nam Ou Cascade Hydropower Project will have a major role to play in the reduction of poverty across Laos,” said Dr Khammany Inthilath, Laos’ Minister of Energy and Mines. “In particular, it will boost the socio-economic development of Luang Prabang and Phongsaly provinces, immeasurably improving the living standards of local residents.

"It will also play an important role in regulating the seasonal drought problems in the Nam Ou river basin. Ultimately, we hope it will ensure downstream irrigation for the region's plantations on a long-term basis, while also reducing soil erosion."

Environmental Impact

Despite the minister's optimism, the project has attracted criticism on several fronts. First, there have been concerns over the possible adverse environmental impact of such large-scale hydropower projects, particularly given the scale and number of hydropower developments happening along the Mekong River and its tributaries. In addition to the Nam Ou project, China is also involved with other hydropower installations, including Don Sahong, Pak Bengand Xayaburi.

A second wave of criticism has come from outside Laos, with several neighbouring countries expressing concern that the cumulative effect of the hydropower projects underway may adversely impact the flow of the river. To this end, the governments of Thailand, Vietnam and Cambodia have all objected to the expansion of Laos' hydropower programme.

The sheer scale of Chinese investment in Laos, together with the country's resultant indebtedness, have also triggered a third wave of criticism. By the end of 2016, with US$5.4 billion worth of funding already in place, China was by far the largest overseas investor in Laos.

According to the Lao government's own figures, by the end of 2016 Chinese companies had signed up for US$6.7 billion worth of construction projects in the country – some 30.1 per cent of the total earmarked for Laos' infrastructure upgrade. The overall scale of the deals already in place makes Laos the third-largest market for China in the ASEAN bloc.

Land-linked Economy

Overall, taking an active role in China's Belt and Road Initiative is seen as a good fit with Laos' long-held ambition to shift from being a land-locked nation to becoming more of a land-linked economy. Furthermore, Laos' ongoing cooperation with China on a series of energy projects has underlined the positive relationship between the two countries.

Speaking at the launch ceremony for Phase Two of the Nam Ou Cascade Hydropower Project, Li Baoguang, the Chinese Consul-General in Luang Prabang, highlighted the point: "This year marks the 55th anniversary of the establishment of diplomatic ties between China and Laos and there could be no better way of commemorating that than with the commencement of work on this joint venture."